Can you explain the tax implications for investors in commercial real estate in India regarding long-term capital gains (LTCG) and short-term capital gains (STCG)? How are these gains taxed, and what factors determine whether a gain is considered long-term or short-term?

Assuming the investor is an individual and is holding the commercial real estate as capital asset, the commercial property will be regarded as a long-term capital asset if held for more than 24 months, else it will be treated as a short-term capital asset.

Long-term capital gains will be taxable at 20% (plus surcharge cess – highest effective could be 23.92%), and short-term capital gains shall be at applicable slab rates (highest effective rate could 39% assuming new regime).

Could you elaborate on the tax relief provided under Section 54F of the Income Tax Act for investors in commercial real estate? What are the conditions and timelines that investors must adhere to in order to benefit from this exemption?

Section 54F of the I-T Act provides for tax exemption to individuals and HUFs on capital gains arising from transfer of any long-term capital asset (other than a residential house) where the sale proceeds is invested in one residential house in India i.e. the new resident house is purchased 1 year before or 2 years after date of transfer or constructed within 3 years from date of transfer.

Exemption amount shall be = Capital gains amount * Cost of new asset

Sale consideration

Further, the exemption is subject to the following additional conditions:

(i) The investor does not own more than one residential house on the date of transfer of the commercial property;

(ii) The new residential house is held by the investor for a period of 3 years from the date of purchase/ construction; and

(iii) The investor does not purchase/ construct any other residential house within a period of 1 year/ 3 years after the date of transfer of the property.

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What are the key details and benefits of investing in Section 54EC bonds for tax exemption when selling commercial property in India? Are there any limitations or specific bonds that investors should consider?

An investor would be able to claim tax exemption (maximum up to INR 50 lakhs) for the long-term capital gains arising on transfer of land/ building (which shall include commercial property) to the extent the capital gains amount is invested in bonds issued by NHAI, Rural Electrification Corporation Ltd, PFC and other notified bonds.

For the purpose of claiming exemption, investment should be made in such a bond within 6 months from the date of transfer of the property and the bond should be held for a period of 5 years from the date of acquisition.

How does the Capital Gain account scheme work for investors who cannot immediately reinvest the proceeds from the sale of commercial property in a new property? What are the timelines and conditions for utilizing this scheme to avail tax exemptions.

An investor who cannot immediately re-invest the sale proceeds of the commercial property in a residential house can still avail exemption under section 54F by depositing the amount of sale proceeds in Capital Gains Account Scheme (‘CAGS’) with any specified bank/ institution before the due date of filing income-tax return of that year.

The amount deposited must be utilized within the stipulated timeframe – unutilized amount is taxed as capital gains in the year in which the period of three years from the date of the transfer of the original asset expires.

Can you provide an overview of the 2023 Finance Bill Amendments related to commercial real estate investments and tax planning? Specifically, how do the amendments impact deductions under Sections 54 and 54F, as well as the maximum deposit in the Capital Gain Account Scheme?

Section 54 shall not be relevant for gains arising on transfer of commercial real estate.

An amendment has been made in sections 54 and 54F by Finance Act 2023 whereby the tax exemption by way of investment in residential house (including temporary investment in CAGS) available under both the sections has been restricted to INR 10 crore. The amendment has been made because the objective of these sections (i.e., to mitigate acute shortage of housing) are being defeated by high-net worth assesses who claim tax exemption for purchasing very expensive residential houses.

Given the above, the amendment shall impact high-net worth assesses who would now have to bear a higher tax burden and may also disincentivise them from investing in residential houses.

(By Punit Shah, Partner, Dhruva Advisors)